This is the worst recession, except for all the...

March 19, 2009

19 March 2009

This Is The Worst Recession – Except For All The Others

The following was written by Glen Hodgson, Senior Vice-President and Chief Economist, Conference Board of Canada.

After nearly two decades of sustained economic growth, the Canadian economy is back in recession. Various media reports tell us that this is the worst recession since 1991, or 1982, or even all the way back to the Great Depression. But is it really? Or have we just forgotten what a recession looks and feels like?

In fact, these are still early days in Canada’s recession of 2008-09. Thus far, we have seen only one quarter of falling GDP in Canada, at an annual rate of 3.4 per cent, although nearly every forecaster agrees that the first quarter of 2009 will be tough and that the recovery won’t emerge until later in 2009. Yet when today’s output decline and job losses are compared to the recessions of 1981-83 and 1990-92, we believe it is far too early to make any firm declarations about which of these recessions was the most painful.

Economists talk about recessions in terms of being U-shaped (long and flat) or V-shaped (sharp down, sharp recovery). Sometimes they can be a bit of each. The 1981-83 recession started like a “U”, but ended as a very strong “V” recovery. At the outset, huge increases in global energy prices in 1979-80 were met with a sharp tightening of monetary conditions in an effort to keep inflation under control. Interest rates soared and output recoiled. The Canadian economy eventually contracted for six consecutive quarters and output fell at an annual rate of 4 per cent for four consecutive quarters. Employment also fell for 18 months, contacting at an annual rate of 6 per cent at the bottom of the cycle.

At that point, however, the Canadian economy sprang into recovery, thanks to pent up-demand for both consumption and investment. Growth leaped ahead by 6 per cent in one quarter, and by nearly 10 per cent in the following quarter as the Canadian economy roared back to life. Job creation took off and quarterly economic growth was sustained for over a year at an annualized rate of 4 per cent or more. Good times were back.

The 1990-92 recession had different and varied root causes – external forces like bursting asset bubbles in Japan and fundamental currency realignment globally, and internal forces like tightened monetary conditions designed to squeeze out inflation once and for all. A very different pattern emerged, that of a U-shaped recession for nearly the entire period. Output fell for four consecutive quarters, declining at an annual rate of 6 per cent in one quarter in 1991 – far worse, we would point out, than the final quarter of 2008. Employment declined in seven quarters over a three year period. And when the economy eventually recovered, output growth was tepid, never going above an annual rate of 2 per cent for seven quarters and even falling again for a quarter along the way. Not surprisingly, most Canadian governments saw their existing structural fiscal deficits worsen due to weak revenue growth, and felt the need to keep spending under firm control -- which took energy out of the recovery.

And what of the recession of 2008-09? The drivers this time are bursting housing bubbles, global financial crisis and a collapse in U.S. demand, particularly for autos and housing where Canada had considerable trade advantages. And the policy response this time is exceptional -- massive intervention in financial systems, record low interest rates and big fiscal stimulus. Almost everyone has an opinion on the recession, ranging from catastrophe to bold recovery. However, the simple truth is that we will only really know the depth and duration of the recession curve after the fact. The economy is recoiling today – but we also know that stimulus is on the way.

So for many, this is the worst


Topic(s): 
Canadian Economy & Politics
Information Source: 
Canadian News Channel
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